Tenet Healthcare Corporation

Greetings and welcome to the Tenant Healthcare second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mr. Will McDowell, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's second quarter 2022 results, as well as a discussion of our financial outlook. Tenet Senior Management participating in today's call will be Ron Rittenmeyer, Executive Chairman, Dr. Som Satoria, Chief Executive Officer, and Dan Kinsellmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation which has been posted to the investor relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represents management expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information Investors should take note of the cautionary statement slide included in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Sam.

All right. Thank you, Will, and good morning, everybody. This quarter, we are once again pleased to deliver strong results based upon our continued discipline management through a challenging market and the previously disclosed cyber attack. We generated enterprise net operating revenues of $4.6 billion and consolidated EBITDA of $843 million. USPI delivered impressive EBITDA growth of approximately 15% excluding CARES Act grants. Volumes were consistent with 2019 pre-pandemic levels. We remain convinced that the demand for our ambulatory surgery services will recover consistently above pre-pandemic levels when COVID prevalence declines. Our hospitals perform very well in a complicated environment. On labor, despite the challenging environment in contract labor rates and utilization, we managed to a modest reduction in overall SWB as a percentage of net revenue from the prior year. We will continue to employ disciplined cost management practices while focusing on building back the high acuity volumes at the heart of our strategy as this new COVID wave runs its cycle. In the midst of these challenges, we are pleased to have ratified a three-year agreement with the California Nurses Association on a new contract that includes eight of our California hospitals. We appreciate the collaboration to support our nurses and maintain uninterrupted patient care in coming to a resolution quickly. The partnerships we have with the unions that represent our employees have resulted in approximately 50 successfully negotiated agreements since the onset of the pandemic. Disruption from the cyber attack clearly added significant pressure on volumes and earnings in April and May. We estimate this incident had an unfavorable impact of approximately $100 million on adjusted EBITDA during Q2. We have filed our insurance claim and continue to insist on full payment from our insurance companies. Unfortunately, the speed at resolving this is slow, but we are committed to driving this to a reasonable and appropriate resolution as quickly as possible. Importantly, this attack should be considered one-time impact. Our systems have been rebuilt, and we have restored network operations. As such, though we typically do not discuss individual monthly results, it is important to note that we saw significant recovery in June, which we believe creates optimism about the second half of the year. June patient acuity was strong relative to April and May, and we saw growth in high-acuity service lines including cardiovascular, neonatal, and spine. We also saw improvement in our surgical admissions, outpatient visits, and outpatient surgical visits, and hospital-adjusted EBITDA, excluding grant income, improved significantly in June compared to April and May. Conifer delivered mid-single-digit revenue growth and margins were strong at 27.9%. We continue our focus on multi-shore recruitment and adding scale in our global business center. These activities are an important component of our ongoing work to expand margins on a sustainable basis. We continue to revitalize our sales efforts and have seen a significant increase in opportunities with our point solutions for new and existing clients. In fact, opportunities with new clients that we are pursuing have more than doubled in the last year. In addition, Conifer will extend point solution services to USPI to further enhance ambulatory revenue cycle performance. As you can see, we are continuing to deliver results across each of our businesses. Based on our enterprise performance year to date and our confidence for the balance of the year, we are once again reiterating our full year 2022 adjusted EBITDA guidance range of $3.375 to $3.575 billion. We believe this is competitively attractive as an outlook and reflective of our business diversification in the ambulatory surgery and conference segments, which are relatively insulated from the contract labor exposure, as well as our disciplined management in the hospital segment. I would like to spend a few minutes discussing USPI in more detail. Our work to accelerate investments in this high-growth area continues unabated. We now own 100% of USPI's voting shares after acquiring Baylor Scott & White's equity position in USPI for approximately $400 million at the end of the second quarter. This transaction does not impact our collaboration with our esteemed partner in the Dallas-Fort Worth market, which we have enjoyed for over 20 years. Our joint venture with Baylor remains one of the largest surgical facility JVs in the country that will work together to continue to grow. USPI is the preferred operating partner for both physicians and health systems as our teams deliver market-level strategic planning, operational excellence, and scale-based advantages that are unmatched. We are the leader in the highly fragmented ambulatory surgical space with approximately 7% market share. We see significant runway towards expansion of our footprint and expect to have 575 to 600 ASCs in place by the end of 2025. Our dedicated development team is constantly identifying new opportunities such as our recent announcement to acquire ownership in 22 ASCs from the United Urology Group. United Urology is one of the largest urology practices in the country. We recently closed the transaction, which adds well-established and new ASCs in key markets like Maryland, Colorado, and Arizona. The deal is an investment of roughly $100 million, and we expect to drive the EBITDA less NCI multiple below five times within the first few years. Partnering with larger physician practice platforms remains an important diversification and growth strategy. UUG is one of a growing number of strategic partnerships we have in place with PE-backed and independent MSOs where physicians are looking for a highly capable ASC partner. Through these collaborations, we help independent physician groups unlock growth in their centers while maintaining their independence, consistent with our historical practice, but now we're doing it at scale. Our ability to deliver operational excellence and synergies makes us a very attractive operator. We also continue to foster strategic partnerships with health systems, some of which build on successful relationships that span many years. One such example is an LOI we recently signed with the Providence Health System to expand our relationship, with whom we have been JV partners since 2004. We intend to invest more than $200 million in ambulatory M&A each year and have a robust pipeline to comfortably support that level of investment. All in for the past quarter, we acquired or opened seven facilities, not including the UUG deal I already mentioned. We continue to be active in the construction of new centers originating from our USPI development team and separately from our SCD partnership pipelines. We currently have about 20 centers that are in active syndication or under construction. The ambulatory surgery business is a highly capital efficient business model with capital needs that are a fraction of what we see in the hospital business. As we continue to scale our ambulatory capabilities, we expect to drive substantial growth in free cash flow for the enterprise. Before I pass the call over to Dan to discuss our results in more detail, I'd like to leave you with a few thoughts. Whether we are in a favorable or a tough operating environment, we are building value for our stakeholders through business diversification and a commitment to disciplined execution. Three months ago, we reported strong results during a challenging Q1 that saw significant inpatient and outpatient disruption from COVID cases. At that time, we maintained full-year guidance for adjusted EBITDA and free cash flow. During the second quarter, we have witnessed our stock price fall by more than a third, continue to see COVID-related staffing disruption, and experience soft utilization in April and May, partially due to a cyber attack. Despite these unplanned obstacles, our team has again delivered solid operating results and maintained guidance for adjusted EBITDA and free cash flow for the full year. Our portfolio mix and strong execution underlie these results. Right now, we are operating in the same challenging environment that everyone faces in healthcare services, but we are executing successfully using the data-driven operating platform we've created. It is driving strong financial results, but at the same time, it is improving quality for patients, continuing to generate value for payers, and finding efficiencies that support affordability. On labor, while contract labor costs remain elevated, we are managing our resources well. Importantly, and to reiterate, both USPI and Conifer, which represent about half of our adjusted EBITDA, are relatively insulated from these issues. As you heard, we are very bullish about where we are with USPI. We now own 100% of USPI's voting stock, a move which we believe is in the best interest of our shareholders and our company, given the compelling growth runway ahead. We are reaffirming our full year 2022 adjusted EBITDA guidance range of 3.375 to 3.575 billion. We believe Tenet continues to present an attractive opportunity for investors, given the ongoing business diversification in the USPI and Conifer, as well as the very strong management of our hospital segment. Even now, but surely as we progress towards 50% of the company's EBITDA coming from USPI, we believe the conditions for a material premium to a hospital-only valuation would be fair and appropriate. And with that, Dan will now provide us more details on the financial results Dan, I'll pass it to you.

Thanks, Simon. Good morning, everyone. Let's start on slide three. We produced resilient financial results in the second quarter that were above the midpoint of our guidance range, despite the adverse impact of the cybersecurity attack, as well as the continuing inflationary wage and labor availability pressures providers across the industry are facing. All three of our business segments performed well despite the challenging environment. We generated consolidated adjusted EBITDA of $843 million. Our results were supported by continued high patient acuity and very effective cost control. To reiterate what Sam mentioned, our labor management was strong as our consolidated SWMB costs as a percentage of revenue were 20 basis points lower than last year despite the severe labor pressures and the cyber incident. Our second quarter EBITDA included two large items that were not included in our guidance that essentially offset each other. The first item is an approximately $100 million adverse impact to adjusted EBITDA that we previously announced in June in our hospital business from the cyber incident. This impact includes the lost patient volumes and revenues due to the business interruption and incremental costs incurred to remediate the incident. Importantly, we have filed insurance claims for these losses and we have ample coverage. While we expect to recover insurance proceeds in the future, we have not included in our 2022 guidance any insurance proceeds in the back half of the year. We did receive $5 million of proceeds in the second quarter. We have sufficient coverage and we will record proceeds in earnings when received and disclose that in a transparent manner. The other large item not anticipated in our second quarter guidance was that we earned $94 million of grant income in the quarter. Again, these two items essentially offset each other. Now I'd like to highlight a few key items for each of our segments, beginning with USPI, which continues to deliver strong operating results. USPI's EBITDA grew 15% excluding grant income compared to last year's second quarter, and its EBITDA margin continues to be very strong at about 41%. And USPI's surgical cases were 100% of 2019 pre-pandemic levels, reflecting continued strong performance by the team. Turning to the hospital business, our hospitals delivered another solid quarter despite the difficult operating environment and the cyber incident that we faced. Our labor management continues to be very effective despite the pressures, especially the temporary contract nurse staffing costs. On a consolidated basis, contract labor costs were approximately 6.2% of consolidated SWMB in the quarter, which was down from 6.8% in the first quarter this year. Again, to provide a frame of reference, contract labor costs were about 5% last year and historically before the pandemic in the 2% to 3% range. The cybersecurity incident did create pressure on our hospital patient volumes, contributing to a 5.3% decline in adjusted admissions. However, our case mix index and revenue yield remain strong as we continue our strategic focus on investments in higher acuity, higher margin service lines. Our year-to-date case mix index is about 15% higher than 2019 prior to the pandemic. And we're pleased to announce that we recently reached an agreement with UnitedHealthcare to extend our multi-year national contract with them through 2025, covering all of our hospitals, ambulatory facilities, physicians, and other providers. Let's now turn to Conifer, which also delivered a nice quarter. Conifer produced revenue growth of 4% over last year, and importantly, revenue from external clients grew 14%. And Conifer continued to produce strong EBITDA margin of about 28%. Let's now move to slide 10 and review our cash flow balance sheet and capital structure items. We continue to maintain more than sufficient cash resources and available liquidity under our $1.5 billion line of credit facility. As of the end of the quarter, we had approximately $1 billion, $350 million of cash on hand, and no borrowings outstanding under our line. We generated $248 million of free cash flow in the quarter before the repayment of the pandemic-related Medicare advances that we received two years ago. As we pointed out in our release, we now own 100% of USVI's voting stock, having acquired the remaining 5% interest that was previously held by Baylor, Scott & White for $406 million. I do want to point out it's important to remember that the $406 million represents the equity value of the business, not the enterprise value. This amount will be paid by us over the next three years with monthly payments of about $11 million on an interest-free basis. We're really pleased to increase our ownership in this high-performing asset now rather than in the future as we believe the value of this 5% interest would have significantly increased given USPI's growth strategies and opportunities. As a result of this transaction, we will stop recording 5% non-controlling interest expense related to USPI earnings beginning in the third quarter. Accordingly, Our annual earnings are expected to increase about $25 million or more going forward as a result of the elimination of this NCI expense. As we previously discussed in the second quarter, we were able to issue $2 billion of six and an eighth secured notes due in 2030. We used those proceeds to early retire $1.75 billion of debt that was due next year, it had an interest rate of six and three quarters. We now have no significant debt maturities for the next two years until July 2024. And we still have about $2 billion of secured debt borrowing capacity available if needed. As a result of our continued growth and focus on deleveraging, our leverage ratio at the end of the quarter was a little under four. And if you think back to 2017, significant improvement when the leverage ratio was about six times. We have strengthened our balance sheet over the past several years and retired or pushed out maturities, which gives us ample financial flexibility to support our growth initiatives. Let me now turn to our outlook for this year. As Saul mentioned, we are reaffirming our adjusted EBITDA outlook of $3,475,000,000 at the midpoint of the range. Again, as I mentioned before, we have not assumed in our guidance for the back half of the year any recovery of insurance proceeds from the cyber incident. We also provided various updated guidance assumptions in our release, namely for hospital patient volumes and revenues. In the hospital business, we lowered our assumptions for inpatient admissions and adjusted admissions, primarily reflecting the impact of the business interruption from the cyber incident, continuing COVID prevalence, as well as the volume impact due to our disciplined approach in the management of capacity and volumes depending on the incremental marginal labor costs. From a cash flow perspective, we continue to target another strong year of free cash flow generation of about $1.5 billion at the midpoint, excluding the repayment of the Medicare advances and deferred payroll taxes. Our free cash flow generation has improved substantially over the past several years, and we expect to continue to drive strong free cash flows while executing on our growth plans. As we've talked about before, these cash flows provide us with significant financial flexibility to effectively deploy capital for the benefit of our shareholders. Our capital deployment priorities have not changed. First, we plan to continue allocating at least $200 million of capital annually to grow our USVI Surgery Center business. Second, to enhance our hospital growth opportunities, including the continued focus on higher acuity service offerings, Third, evaluate further opportunities to retire debt or refinance debt. And finally, possibly next year and beyond, evaluating a share repurchase program depending on market conditions and other investment opportunities. And with that, we're ready to begin the Q&A. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may respond to as many questions as possible, we ask that you please limit yourselves to one question each. Our first question comes from the line of A.J. Rice with Credit Suisse. Please proceed with your question.

Hi, everybody, and congratulations on navigating through a tough environment pretty well. You know, we often ask about puts and takes for next year. I'm going to ask you about that for the back half of the year. Your implied guidance, I think, at the midpoint would be something like $800 million in EBITDA for the third quarter. which will be sequentially down from both the second quarter and the year-ago period. And then in the fourth quarter, it's something like $944 million of EBITDA, and that would be a step up. Is this mainly a return to seasonal patterns? Are there other things that are puts and takes that you'd call out that would give you comfort, particularly for the fourth quarter, but for the back half of the year as you move? think about where you're sitting with guidance for that period.

Hey, AJ, it's Dan. Let me address that. In terms of your points about the guidance in the back half of the year, we do anticipate some seasonality in the third quarter, which is not unusual in the business. So when you're thinking about the Q2 earnings moving forward sequentially to Q3 of about $800 million, We feel comfortable with that estimate. And then as you move to the fourth quarter, historically, fourth quarter is seasonally much stronger, not only for the hospitals, but more importantly for USPI's business. Many people meet their deductibles and try to get procedures in by the end of the year. So we're anticipating a strong ramp on the USPI side from Q3 to Q4 as well.

Okay. And SCD, year over year, is that moving the needle much for you, thinking about that fourth quarter in particular?

Absolutely. Absolutely. The transaction, the SCD transaction from, you know, that we completed last December, that's also part of the year over year growth.

Okay. All right. Thanks a lot.

Thank you. Our next question comes from the line of Whit Mayo with SVB Securities. Please proceed with your question.

Hey, thanks. Maybe for Salma or Brett, but you guys have alluded in the past and maybe even more specifically on this call to a lot of the investments that you're making in USPI. Maybe I'm referencing more a lot of the efficiency and the productivity initiatives. Can you maybe just elaborate a little bit more on the specificity of what you're doing. Are these just, you know, changes to the EDGE program? Anything that's just an extension of that, any color would be helpful.

Brad, why don't you take that, and I can comment further if needed.

Yeah, hey, Whit, this is Brad. Yeah, I mean, I think it is an ongoing effort for us to continue to refine our EDGE philosophy and our EDGE program, so certainly we've We've continued to build that program and that philosophy since the company was founded 22 years ago. So I don't think it's a change in terms of strategy at all, but a refinement of our overall edge process and continue to enhance it just over a period of time as we learn more and as we benchmark good facilities against better facilities and continue to drive performance that way.

Okay, thanks.

Thank you. Our next question comes from the line of Justin Lake with Wolf Research. Please proceed with your question.

Thanks. A couple of numbers questions here. First, can you give us a little more color in terms of the impact and how you sized it to that $100 million on the IT issue in terms of cost and revenue and margin on that lost revenue? And then on the commercial contracting side, you mentioned the United Contract. I'm not sure you want to give us a specific data point, but How are you seeing commercial contracting for 2023 in terms of rate increases relative to what you had seen previously? So maybe give us the last two to three years of contracts and what you think 2023 is going to look like versus renewals are going to look like versus those last two to three years. Thanks.

Hey, Justin, Stan, good morning. In terms of the impact of the cyber incident, as we pointed out, the approximate impact to EBIT was about $100 million in the quarter. In terms of the breakdown between lost revenues and incremental costs incurred, we haven't put out specific numbers for each of those, but I would tell you that the vast majority of of that $100 million relates to lost volumes, lost revenues. But yes, we did incur incremental costs as well to remediate it. And in terms of your managed care point, obviously we were pleased to extend our multi-year contract with United in terms of, you know, we're obviously not going to get into specific terms related to the contract, But, you know, I would say, you know, we get questions a lot about, you know, hey, are you guys going to get, you know, rate increases from the plans to cover off CPI of 8 or 9 percent? You know, we don't see that happening. But, you know, listen, you know, we believe the contract we just entered into gives us long-term visibility into our pricing. We have annual escalators in the contract, and, you know, we're pleased with the terms of the arrangement. You know, in terms of, you know, overall going into next year and beyond, you know, obviously, you know, every conversation we're having with plans, you know, inflation environment is obviously top of mind and, you know, it's something that, you know, we take into consideration when we're negotiating the terms. You know, overall, you know, where do we think, you know, rates will be? You know, what we've, you know, really have talked about in the past is, you know, we see, you know, rate increases, you know, 3%, 4%, 5% type of, you know, range. But, you know, that's about all I'm going to comment on specifics.

Thank you. Our next question comes from the line of Peter Chikering with Deutsche Bank. Please proceed with your questions.

Hey, good morning, guys. I'm going to follow up on Adid's question just from a different angle. There's a lot of noise with the hospitals for this quarter due to cybersecurity and a bit of noise from COVID and USPI. So can you walk us through a little more detail of the trends you saw in June and what gives you confidence around the third quarter guidance that you provide us? And feel free to give any commentary around how July is trending versus June. And then on the revenue reduction for guidance, how much of that was coming from cybersecurity versus reducing revenues the back half of the year?

Well, let me start, and then Dan, maybe we can get into some of the specifics. But first of all, to reiterate, Pito, what I was saying on the first part of the earnings call, we saw substantial recovery when we got back to normal operations in our hospital business. The cyber event didn't have material impact at all on USPI, so this was primarily a hospital segment-based effect with a little bit on conifer. And that recovery was strong on virtually all the dimensions that drive the business. I mentioned a number of them. And so that gives us a lot of confidence as we look to the back half of the year. And that's in an environment where from the beginning of the second quarter to the end of the second quarter, as you know, the COVID activity has risen. And so that's, you know, that's also a good thing that we continue to see that strength in the hospital segment from that perspective. You know, on Conifer, the disruption from the cyber attack was, as I said, a small part of the effect. But importantly, you know, their ongoing cost improvement initiatives, offshoring initiatives and growth runway provide margin expansion opportunities and just earnings expansion opportunities. And then finally, at USPI, we're pleased that we're sitting at roughly 2019 or pre-pandemic levels of volume. Look, I think COVID has two effects there. One is you get some increase in cancellation rates. And the second thing is if physicians' offices are not running at full throughput, that can have a little bit of a downstream effect. So we're actually really happy that the business showed the strength that it had And as we get through this COVID wave, I think we're going to see even strengthening demand in that area. Obviously, as Dan pointed out, the seasonal effect in the fourth quarter is critical to the ramp.

Yeah, and, Peter, in terms of, you know, our confidence in Q3 and the revenue guide, the updated revenue guide, a couple things on that in terms of, you know, As we pointed out, the hospital business really strengthened in June. And as we saw during the quarter, contract labor also moderated. So, you know, that's obviously a positive sign. And so when we think about, you know, the back half of the year, that gives us more optimism, obviously. In addition to, you know, USBI, we fully believe it's going to continue to grow. The revenue guide that you pointed out, the guide down, really relates to several things. One, the cyber incident is certainly a big part of that. But also, when you think about the back half of the year, based on the volume trends that we saw in the first quarter and second quarter, as well as how we've been managing the our operations and looking at the, you know, marginal costs of certain volumes and whether, you know, those marginal costs economically make sense to, you know, staff for those volumes. So we've obviously taken that into consideration in our revenue guidance in the back half of the year. But we're managing through that and, you know, maintaining our overall earnings guidance. Great, thanks so much.

Thank you. Our next question comes from the line of Jason Casorla with Citi. Please proceed with your question.

Great, thanks. So you alluded to this expectation for continued demand development for USPI, but I'm wondering if you're seeing any pressure on cancellations or otherwise if folks are perhaps reprioritizing their discretionary income spend just given the high inflation backdrop? Just any color commentary on that would be very helpful. Thanks.

Yeah, it's a good question. I would tell you that, you know, we look very carefully at the mix of cases we're seeing within the business. We feel comfortable that the impact that we see, the small impact that we see, from a cancellation standpoint is mostly related to COVID activity in the background, as opposed to a more fundamental shift in demand or consumer preference. And we feel comfortable with the demand that we're seeing, even in some of the, what I would describe as lower acuity type of procedures within the platform. And so I don't see at this point, any evidence that is obvious that there are more fundamental shifts in demand affecting the USPI business. And that, you know, we're pleased with that today.

Hey, and so the only thing I would add, and you alluded to it, you know, in the second quarter, we also saw a nice recovery of some of the lower acuity cases, such as ENT and ophthalmology and GI that were really slower to recover from the pandemic. So that was actually a good sign.

Great. Thanks.

Thank you. Our next question comes from the line of Josh Raskin with Neffron Research. Please proceed with your question.

Thanks. Good morning. On the labor front, I'm curious, do you get a sense that your employed, you know, nurse workforce is stabilizing, that they're not seeking, you know, as many of these travel tours, as we'll call them, or do you think there's a new normal where nurses may be more willing to travel than they have in the past, right? They've been exposed to it. They've seen it. Now maybe that continues at sort of elevated levels, you know, relative to pre-pandemic. And then could you just give us a sense of where your hourly base rates are for nursing staff relative to where they were maybe a year ago or even two years ago? Hey, Josh.

A couple of things. One is we are pleased with the efforts that we're putting in both in terms of recruiting overall and the impact that's having and new grad recruiting based upon a lot of the nursing school relationships that we've formed over the past year, anticipating this challenge. I don't know whether it's a new norm in terms of the rates of nurses desiring to travel. I somewhat feel that there's price elasticity in that. And so the traveling rates are higher now than they were pre-pandemic. But the rates are still high. And, you know, as those price points or data points from the standpoint of what traveling nurses are earning come back towards normal, we think that probably the market will normalize somewhat. You know, I would use this as an opportunity to point out that our TRA, you know, the internal tenant resource agency that we run, has been a bit of a buffer to help create longer term assignments even within a traveling environment to help with our own nurse staffing stability and that that's been a tremendous resource for us throughout this and at a discount to the overall travel rates that you see out there so you know i think this is going to be an important agenda item for at least another year or two in really ensuring high degree of execution in recruiting and retention and creating an environment for nurses where they can seek their career paths that they want. And at the same time, you know, continuing to manage the contract labor rates down. We haven't gotten into details on our base wage rates. I would just point out that it's the complication in looking simply at unit rates is that you have to think about that alongside the tenure of the nurses that you're bringing in that are new. And some new grads, for example, with less tenure would have lower base rates. And so those, you know, we think that we're managing the average wage of our hires very well based upon the balance between those items. Dan, I don't know if you want to add anything there.

No, I think that's right, and we've been very focused on one of the strategies to reduce the high contract labor spend has been to focus on recruiting full-time employees, and that's had a benefit in terms of what we're seeing on the contract labor side, which is at least heading in the right direction.

Thank you. Our next question comes from the line of Jamie Purse with Goldman Sachs. Please proceed with your question.

Hey, good morning, guys. We hear a lot about supply shortages, things like semi-chips, contrast-mediated, other basic supplies. Can you give us a sense of if any of these categories or others are impacting you guys or creating any volume bottlenecks on either the USPI side or the hospital side, and are any of these dynamics changing, getting any easier to manage?

Yeah, Jamie, I would say that some of the specific shortages that you've seen, whether it's contrast media or other things, given our supplier environment, we did not see a significant impact from those. Obviously, like others, we participated in helping other hospitals when they had acute shortages for patient needs by sharing in local markets what we had. But we have not seen what I would describe as any of those that made kind of headlines become a major issue for us. With that question, there's still additional expense that's sitting in the unit costs that manufacturers of various items are putting through. There are certainly, I wouldn't necessarily say, you know, fully shortages, but there certainly have been delays in shipments and other things, including, you know, what I would describe as clinical capital equipment over this period of time. But, you know, again, this is an area where we have a well-oiled machine to manage our suppliers and supply chain, and we have been working through that with the manufacturers in many cases directly. in order to ensure liquidity in that supply chain such that we don't have any disruption to patient care. The other thing, of course, that in this environment you have to do is continue to work on improvements in narrowing the range of suppliers and offsetting inflationary trends. And, you know, based upon our results on the supplies line, you can see that we've, you know, this has been a multi-year focus. It's continued during the pandemic. And it's been quite successful, including in the area that pushes into purchase services. So this is an ongoing efficiency agenda in the hospital business and very much so at USPI. Okay. Thanks for the call.

Thank you. Our next question comes from the line of John Ransom with Raymond James. Please distribute your question.

Hey there. the back half of SPI guidance. I think it's fair to say the last four years have been a lot softer from a volume standpoint. So could you maybe help with what sort of volume assumption you're building out back half of the year? And, you know, I'd also be curious to know the orthopedic mix on a same-store basis. I mean, by all accounts, you know, there's a shift in orthopedics outpatient You know, it's not coming up yet in your consolidated numbers. Just help with both of those would be great. Thank you.

All right, John, I think your question, you were breaking up throughout that, and I think your two questions were about USPI's second half guide and the, in particular, orthopedics mix in the business. So let me just tackle the latter first, which is that, Orthopedics, you know, obviously is a very, very important platform within USPI as the largest provider of outpatient orthopedics. We continue to see attractive growth rates in that market and in particular at USPI. You know, as Brett described before to Whit's question, we've undertaken a new energy in seeking efficiencies in both the supply chain and in labor management at USPI. largely leveraging the same kind of data and analytics platform that has been well embedded into the hospital side. So, you know, one of the things we haven't talked about yet is the margin expansion at USPI this quarter has been based on both high acuity like orthopedics and additional and new types of efficiencies that we are finding within the business. So, We feel pretty good about that orthopedics platform from that perspective, and as volumes recover, the ability to put a lot of that to the bottom line because of the efficiencies. Dan or Brett, do you guys want to cover the second half guide?

Yeah, yeah, I'll address that, Psalm. Hey, John, this is Brett. So we had, just to put it in context, we had 600 million of you, but on the first half of 2022, therefore our guidance was, suggest $800 million for the second half. At the midpoint, that suggests 57% of our EBITDA in the second half, which is a little less on a percent basis than we saw in the second half of 2019. So we feel pretty comfortable with the percentage breakdown between the second half and the first half, considering how it looks compared to 2019. Thanks so much.

Thank you. Our next question comes from the line of Kevin Fishbeck with Bank of America. Please proceed with your question.

Good morning. Thank you for taking the question. This is actually Joanna Gadzik filling in for Kevin today. So just a couple of follow-ups. So you mentioned contract labor expenses declining Q2 versus Q1. So can you give us, I know there were some questions around your permanent nursing wages, but can you give us a flavor of where you see the temp labor rates per hour trending, either in absolute or in percentages, you know, Q2 versus Q1 and Q4? And also you mentioned, you know, recruiting, seeing some traction there. So any stats you can give us on recruiting and turnover would be helpful too. Thank you.

Dan, you want to cover that? Yeah, in terms of the contract labor rates, we did see some moderation in the second quarter compared to the first quarter. And we put the stats out there where we were close to 7% in the first quarter and closer to 6% in the second quarter. So And that was a mix of not only utilization but rights as well. And as we think about as we move through the rest of the year, we are anticipating some additional moderation. But we're not saying we're going to get anywhere near back to where we were before the pandemic. And probably, you know, last year, you know, we were about 5%. And, you know, we'll see where we end the year. But obviously, nice improvement. And so that's obviously heading in the right direction. In terms of, you know, again, we're not going to get into specifics in terms of rates, you know, for full-time employees. But as, you know, as Sam pointed out a few minutes ago, Again, it all depends on the tenure of the clinician that you're hiring that has an impact on the overall rates, at least from an average perspective.

But I guess outside of the rates, any stats in terms of your turnover and recruiting efforts in terms of where it's tracking percentage-wise?

Yeah, we're not going to get into specific turnover percentages.

Okay, thank you so much. Thank you. Our next question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Thank you very much. I was wanting to get your initial thoughts on the OPPS proposed rule, both kind of the rate update and then also I know there was a push several years ago to move kind of that OPPS update from a CPI-based update to an hospital MBU. And I think we're coming up on the last year of a five-year period where it is based on the hospital MBU. And then kind of given that that MBU is 3% update or so is lagging 9% CPIU, kind of implications for maybe CMS moving it back to a CPI-based and how you guys are thinking about that after next year. Thanks.

Hey, Ben and Stan, let me address that. You know, I would say that, you know, the proposed OPPS rule for, you know, outpatient services were disappointed in the rate that was proposed. And when you, you know, even further adjusted for the anticipated impact of the 340B adjustment that, you know, there was some alternative rate information provided, that the rate increase is almost flat. We estimate ours to be about 50 basis points increase after the 340B adjustment, which would be $5 million or less in terms of annual increase. We believe that's insufficient given the current inflationary environment. Obviously, we're working with all the appropriate agencies constituents and making sure our concerns are raised at the appropriate levels. But right now, we're disappointed with the rate update that's being proposed. In terms of CMS moving off and changing the methodology down the road, we'll see where that plays out. We can't make any predictions at this point. Now, the one thing I would say, and that's on the hospital side, the rate update on the USPI side is more attractive, although we still believe it's insufficient given the current inflationary environment. And we anticipate that that annual adjustment to the rates based on what's been proposed for USPI That would be approximately $25 million of additional EBITDA on an annual basis going forward based on the current proposed rule.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, we ask that you please limit yourselves to one question each. Our next question comes from the line. I'm Anne Hines with Mizuho Securities. Please proceed with your question.

Hi, good morning. I just want to focus on the inpatient and outpatient admission trends in the QQR segment, down 8% or 5%. Can you tell us how much is from maybe the cybersecurity weakness versus how much is from capacity management versus how much is just from maybe a softer demand environment?

Hey, Stan, let me, I'll start on that. It's really related, all three of those. to be quite frank with you. We have not disclosed a specific number for the impact related to cyber. There's been lawsuits filed and similar to other pending litigation. We don't necessarily get into specifics of pending litigation, but I would say that we called this out in a release that the cyber incident certainly had you know, a pretty big impact on volumes in the quarter. Your point about how we're managing the business, that's very true as well, and that is having an impact on the aggregate statistic. And we, again, took that into consideration when we thought about our volume assumptions for the back half of the year as well as our revenue assumptions. But again, we're managing through that and maintaining our earnings Your other point, the third point about, you know, COVID continuing to be there, you know, I think that's fair. You know, it's having an impact on, you know, aggregate volumes on the hospital side as well as obviously on the USVI side, but more so on the hospital side. So it's really, you know, it's a combination of all three of those components, and certainly in the second quarter, you know, the cyber issues. incident had a large impact.

So I guess the reason I'm asking about the capacity management is, can you just describe more which capacity lines you're shutting down, and do you expect to open them once the nursing shortage is relieved? And competitively, do you think that market share is lost or you can gain it back?

Let me make a few comments just to give you color around this, and I'm not going to get into specifics. It's different by hospital. There are two things to consider. The first is that, as I've indicated, our approach to prioritizing our high-acuity services and, in particular, the surgical and procedure-based areas continues to move forward on all dimensions unabated. And we follow those trends very, very carefully to ensure that we are not only maintaining but building market share in those areas. And we feel very good about that. The second thing is that, you know, in terms of the capacity management, there is a lot of low acuity or other work, often medical in nature, that is difficult to staff. given the cost of excessive contract labor. And this isn't about just kind of the marginal revenue and the marginal cost. The reality is that the cost structure needed to staff up to take care of a lot of that volume is significantly more than just the marginal unit cost of one additional nurse. And we realized that very early in the pandemic. And so we have been very deliberate in managing our capacity in a way that has prioritized maintaining open access, making sure that our high acuity strategy continues to progress unabated, and is thoughtful about the margin generation in the hospital by not building in excessive costs through staffing up every floor. As labor rates come down on the contract side, and in particular, as more and more traction is built on hiring of more full-time staff in this environment, and to the point made earlier, travelers decrease, we'll have the ability to open up those units and deliver that volume on a profitable basis, and we'll assess that hospital by hospital and do so. Look, I think one important thing to realize about this is this is all fundamentally built around a system that we created a few years ago that is real-time analytics driving real-time decisions within the system that's been embedded into the operating model of Tenant at this point. And that's really important because it's just another thing about the fundamental discipline in our operating management that we've put into place over the last four years. And so I'm not as worried as you indicate about market share in specific areas, but I am very much following the labor rates carefully to think about when and how to sequentially open up capacity in a way that it will be profitable.

Thank you. Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.

Thank you. I was hoping that you could help us take a step back and think about the spread between cost trend and pricing that you're experiencing in 2022 and how that spread differs from a normal or pre-COVID year so we can get a sense of, you know, the unique pressure that's happening this year and then given what you know of the pricing environment already next year, if you really think about that spread compressing or expanding.

Hey, Sarah, it's Dan. Yeah, let me start off on that. I would say the primary difference in the pricing and cost trends now versus before the pandemic is on the cost side, the biggest pressure in this environment has been on the contract labor spend by far. And we called out some numbers earlier where, again, contract labor was previously 2% to 3% of our SWMB. this year, you know, it pushed 7% in the first quarter. Now it's come off, which is good to see in the second quarter to about 6%, but still significantly higher than, you know, before the pandemic. You know, listen, are there other, you know, inflationary pressures on the expense side? Sure. But the contract labor has been the most significant inflationary pressure. In terms of pricing, so on the revenue side, the yield, You know, I would say I think it's – listen, as I said earlier, you know, the current inflationary environment is top of mind in every conversation we're having with plans. And so we obviously take that into consideration. But, you know, again, it's not like the plans are sitting there offering, you know, 9.1% because, you know, the CPI, that's what was just published. But, you know, I would say, you know, we're very pleased with our – insurance contracting positions. We have been, and we continue to be, and it's been very beneficial for this organization across all of our businesses. And, you know, our contracting positions provide us a unique competitive advantage, we believe, when we're looking at potential, you know, M&A on the ambulatory side or de novo development or working with potential new partners. So I think, again, the biggest issue on the expense side has been the contract labor.

Thank you. Our next question comes from the line of Brian Tenklit with Jefferies. Please proceed with your question.

And this is going to be our last question, operator.

Yeah, thanks for squeezing me in. Brett, just a quick question on just the trends at USPI. I'm curious what your thoughts are on some of that deceleration and case growth that we saw in the quarter, and maybe if you can give us any color on the trend intra-quarter and what you're seeing now in terms of any sort of recovery specific to the ASP. Thanks.

Hey, Brian, we're not going to comment on July and into this quarter, but on any of the business units, as Dan indicated, but Go ahead, Brad.

Yeah, okay. Hey, Brian, I'll just touch briefly on kind of the volume for the quarter. Look, it was slightly down, as you heard, on a same-store basis, but we're still tracking to 100% of 2019 volume, and this was with an elevated cancellation rate over a prior year, primarily as a result of increased COVID activity, and I think as Saul mentioned, some physician offices simply aren't back to pre-COVID levels. That said, our net revenue per case was ahead of plan at 3.7%. We managed expenses well and grew even up 15% year over year. So we're pretty pleased with the quarter overall.

Okay. Well, thank you, everyone. We appreciate the questions and have a nice day.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect your lines. Thank you for your participation.